Japan’s turmoil aftermath – preliminary outlook

Japan suffered in the recent tsunami attack thousands of dead and missing persons (the current tally is over 19,000 dead or missing), and billions of dollars worth of damage. There are still perils from this tsunami including the condition of the nuclear reactor in Fukushima, and Japan needs to recover all missing persons, thus it’s very early to consider the aftermath of this disaster with all the ramifications.

Nonetheless, let’s try to list very preliminary points to consider in regards to outlook for Japan. In particular, the main aspects will probably be related to finding energy solutions, stabilizing the financial markets and raising capital to fund the recovering the damage.

 

Energy solutions: Japan relies heavily on nuclear and oil as the prime sources of energy. Japan is the third in usage of nuclear energy in the world and has 53 reactors that supply 34.5% of its energy. Japan has a plan to reach 50% of its electricity usage by nuclear energy by 2030.

In the tsunami attack 11 of its nuclear power reactors were damaged along with five of its oil refineries. This means that an early estimate of 7-10% of Japan’s energy sources from nuclear and oil were damaged in the recent tsunami.

In order to bring back the same energy capacity before the turmoil, Japan will need to look not only for other immediate resources such as natural gas and coal, but also for long term solutions that will require funding and investments. Since crude oil price is currently very high (at over 100 USD) and the European oil market is tight due to the Libyan turmoil, it’s possible that Japan will look towards natural gas and coal as short term solutions because they are much cheaper than crude oil.

In order to plan long term energy solutions and to recover from all the damage done by the tsunami Japan will require investments. Let’s consider some points about the current economic condition of Japan vis-à-vis raising capital:

 

  1. Monetary policy: in recent years Bank of Japan printed Yen as part of its quantitative easing plan in an attempt to stimulate the Japanese economy and recently because of the tsunami attack. It was reported that BOJ expanded its QE program by printing 15 trillion Yen (183 billion USD). Most of this money will be to buy Japanese government bonds. This plan might also have adverse affect on the Yen and devalue it compare to other major currencies;
  2. Government bond: as of March 2011, the 10 year notes’ yield is 1.26% – didn’t change much throughout 2011 so far, and lower than the yield in March 2010 (1.35%). Thus BOJ will buy bonds at very low yield. The market reacted to the tsunami attack on Japan by increasing the CDS (credit default swap) spread of Japan government bond to 117 basis points (i.e. the yearly payment the CDS buyer needs to pay is 1.17% of the entire debt). Not to worry, however, Japan is far from being in a trouble zone, e.g. Ireland’s CDS spread is 539 basis points. Nonetheless, if these indicators will start to rise in the months to come it will imply that Japan has a problem in raising debt;
  3. Japan’s prime debtor: the biggest debtor of Japan is the US with over 885 billion USD, and Japan is only second to China with 1.1 trillion USD in the list of countries that own US debt. Since the US’s external public and private debt is 14.3 trillion USD which is estimated at 97% of its GDP, there is little chance that Japan will be able to get this debt back anytime soon, so that Japan can’t rely on cashing this debt to pay for the tsunami damage.
  4. Japan’s current debt: the current external private and public debt of Japan is estimated at 2.2 trillion USD, which is roughly 51% of its GDP. Japan’s public debt is 225% of its GDP. This shows that Japan’s starting point isn’t a great one in raising debt to cover the tsunami damage.    

These conditions brings into light some of the challenges Japan have to face when looking for ways to find monetary and energy sources in order to deal with the aftermath of the tsunami and earthquake attack. 

 

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